Russian Brokers Gain From Crisis, Profits So Rich They're Trading From the Beach

By Halia Pavliva and Ksenia Galouchko -
Apr 23, 2014

It was a vacation that Russian stock broker Alexander Antipov said he dreamt about for two decades: a tropical getaway from the harsh Moscow winter to the white-sand beaches of Acapulco, Mexico.

Yet as Antipov, the head of sales at Moscow-based Veles Capital LLC, settled into the Park Royal hotel with his family last month, his mobile phone kept ringing. Clients were unnerved by President Vladimir Putin’s push into Ukraine and wanted to know if they should sell as stocks sank. Antipov fell into an odd schedule -- trading by night from the hotel balcony to avoid waking his kids as markets opened about 7,000 miles away in Moscow and napping during the day.

“It felt surreal,” Antipov, 40, said in an April 15 phone interview from Veles, a brokerage firm founded in 1995. “Most of my clients were selling. Some had the courage to buy.”

The Ukrainian crisis is making 2014 a busy, and potentially profitable, year for Russian stockbrokers. While investment bankers have seen their fees plunge as deals dry up amid the conflict, trading in equities almost doubled on average at 50 Russian brokerages in March from February and has remained elevated this month, according to data from OAO Moscow Exchange.

The RTS Volatility Index, which uses futures to measure expected swings in Russian equities, is more than double the level of December, even after falling from a five-year high reached March 3.

Market Opportunity

“Market volatility is always tied to an increase in volumes and to a rise in opportunities for investment banks,” Igor Vayn, chief executive officer at Renaissance Capital Ltd., said in an interview at the Moscow-based firm’s offices on April 8. “Crisis is a time of opportunity. Many fortunes will be made.”

The Micex Index (INDEXCF), the benchmark gauge of stocks traded in Moscow, fell 0.5 percent to 1,329.11 today. The index has advanced 7.4 percent since reaching an almost four-year low on March 14. The Bloomberg index of the biggest Russian companies listed in the U.S. dropped 0.9 percent to 81.54.

The recent price swings and the pickup in transactions are similar to the surge in volatility triggered when Russia sent troops into Georgia, another former Soviet republic, in 2008 during a five-day war.

Georgia War

“I remember the selloff we saw when the first shots were heard in South Ossetia in 2008,” Antipov said. “I remember those feelings; people were exiting, fleeing the market.”

Six years after Russia enforced its control over the separatist South Ossetia and Abkhazia regions in that war, Putin is strengthening his grip with the incursion into Crimea and the annexation of the Black Sea peninsula.

The U.S. blames Russia’s government for instigating trouble in Ukraine’s east and has threatened to impose further sanctions against Russian interests. Russia denies involvement in the unrest, saying authorities in Kiev are ignoring pleas from Russian and Russian-speaking citizens.

The average daily volume in 334 shares and one depositary receipt listed on the Moscow Exchange jumped to 66 billion rubles ($1.85 billion) in March from 34.6 billion rubles in February, according to data from the bourse. The total turnover in equities, mutual fund shares and Russian depositary receipts reached 1.3 trillion rubles in March from 692 billion rubles the month before.

JPMorgan Upgrade

JPMorgan Chase & Co. raised Moscow Exchange to the equivalent of buy on April 11, increasing its 2014-2016 earnings-per-share estimates by 7 percent to 8 percent on “elevated” market volatility, among other factors, according to an e-mailed note. Moscow Exchange’s shares have advanced 12 percent since March 14.

Moscow Exchange spokesman Andrey Braginskiy declined to comment on the outlook for the exchange’s profit from rising trading volumes this year and whether transactions will keep increasing.

The crisis hasn’t been nearly as beneficial for investment bankers. Fees on Russian deals, including everything from bond sales to mergers and acquisitions, have dropped 67 percent this year to $108 million, according to data from Freeman & Co., a New York consulting firm.

VTB Capital, Russia’s largest investment bank, is considering cutting most of its New York staff including its trading operations if further sanctions are enacted, two people with knowledge of the plan said this week. Atanas Bostandjiev, the London-based chief executive officer of VTB’s U.K. and international operations, said in a statement today that the company has no plans to close its New York office or wind down trading activities there.

‘Proper De-Escalation’

The bonanza for equity traders may prove temporary should Russia fail to defuse the crisis and show investors its capital markets are safe, according to Luis Saenz, the London-based head of equity sales and trading at BCS Financial Group.

“Jumping up and down on the spike in March volumes is somewhat short-sighted,” Saenz wrote in an April 9 e-mail. “What would really interest me, and I gather fundamental investors, is to see proper de-escalation on the Crimea geopolitical front. If this is not solved, in the medium and long term volumes will go away as international investors will be spooked.”

Equity turnover at Deutsche Bank AG (DB)’s Russia unit jumped 96 percent to 102.6 billion rubles last month. Volume has dropped in the past couple of weeks and business remains driven by developments in Ukraine, said Dimitri Agishev, a spokesman for the firm in Moscow. He declined to comment on the outlook for traders’ bonuses.

RTS Volatility

The flurry of buying and selling of Russian equities has carried into April. The average daily number of shares that changed hands on the Moscow Exchange in the first three weeks of the month was 107 billion, equal to a total value of 595.7 billion rubles. While down from about 167 billion shares in March, which put total trading that month at 1.3 trillion rubles, it remains higher than the average of about 86 billion shares over January and February.

Volatility, while easing, remains high. Since soaring to a five-year high on March 3, the RTS volatility gauge has slid 50 percent to 37.45, according to data compiled by Bloomberg. That’s still 2.4 times higher than Dec. 24, when the index reached its lowest level since at least 2006.

Stock trading volumes at Antipov’s Veles Capital more than tripled to 8.75 billion rubles in March from the previous month, according to exchange data. He declined to give estimates on profits or what trader bonuses could look like this year.

“The political situation overshadows the economic situation right now,” said Antipov. “It’s very hard to make any forecasts.”